A Case Study of How Government Handouts Undermine Human Decency and Social Capital

Why is big government bad for an economy? The easy answer is that big government usually means high tax rates, and this penalizes work, saving, investment, and entrepreneurship. And perhaps some of the spending is financed by borrowing, and this diverts money from private investment.

That’s a correct answer, but it’s only part of the story. In most cases, there is added damage because politicians spend money in ways that further undermine incentives to produce.

For instance, let’s assume a government spends $1 billion on some sort of redistribution program. Extracting that money from the productive sector of the economy obviously will cause some damage, but it’s also important to estimate how the supposed beneficiaries of the money will react. What if they decide to earn less income in order to be eligible for the handouts, as even the statists at the OECD have recognized?

In other words, it hurts the economy when government collects money, and it often hurts the economy when government spends money. Sort of a perverse 2-for-1 special (though “Rahn Curve” analysis does show that some types of spending – on core public goods – is correlated with better economic performance)

Let’s look at an example from Greece, showing how handouts distort behavior and corrupt people. Here are some remarkable tidbits from a Wall Street Journal story.

The Greek health ministry is investigating on Zakynthos after local officials flagged records showing what they said is an implausibly high number of disability claims for blindness. About 1.8% of the island’s population of 39,000 claimed the benefit last year, according to the health ministry. That is around nine times the prevalence of blindness estimated for many European countries in a 2004 study published in a World Health Organization journal. Among those who put in for the blindness benefit on Zakynthos, a local official said, were a taxi driver and a bird hunter. …But the island is hardly alone, according to health ministry officials, who say fraudulent disability claims are a problem across the nation… Zakynthos Mayor Stelios Bozikis on a Greek television talk show said residents angry about the benefits crackdown and other financial overhauls pelted him with yogurt at a recent event.

Let’s go back to the story and look at a rough estimate of how much fraud exists.

In an attempt to root out fraud, the Greek health ministry recently required disability claimants nationwide to register in a centralized database, appearing in person or sending a representative. The registration resulted in 36,000 fewer disability claims than in 2011, the health ministry said. The ministry alleges these dropped claims were fraudulent, in many cases reflecting multiple claims for the same disability or payments in the name of dead beneficiaries. It also alleges that some doctors accepted money for false diagnoses and some local politicians signed off on the benefits to win support, and said it is giving public prosecutors information about areas where it suspects a high level of fraud. Only 190 of the nearly 700 people it says had been collecting the blindness benefit on Zakynthos participated in the registration, the ministry said.

I have no idea if Zakynthos is representative, but that’s an incredibly high fraud rate. And this is just a glimpse at the workings of one government program. Now multiply that by some large number and you’ll begin to understand the damage caused by government.

And America is not immune. When politicians make it easier to ride in the wagon than to pull the wagon (as this cartoon illustrates), society sooner or later gets in trouble.

18 Responses

Well it works out so well when you rid your people of the idea that, “You shall not steal”. What could be better then you should rob your neighbors blind by theft? Hello post-modernist society, wait we’ve been here before haven’t we?

Millions will modify their behavior partially withdrawing from the economy (some wholly withdrawing) to become eligible for the significant subsidies. Millions will withdraw to happier less productive lives so they can claim economic disability to pay the premiums (in ObamaCare widely defined as making less than 80-90k per year).

With the margin of American production advantage over the rest of the world already worn very thin, looming tax increases one way or another, and more regulation restrictions, the end is near. America is about to embark on the unstoppable slide to decline. It is virtually impossible to regain control once the pendulum starts swinging in the opposite direction.

By the time the European decline becomes accepted even by HopNChangers, America will be well entrenched into the same irreversible fate. It’s lights out for the beacon of freedom. That’s what you wanted though: copy the rest of the world. Well you got it. And your once unparalled prosperity advantage will follow same fate. Have a few years of fun while the ship goes down. The initial stages of decline can be fun. I’m Greek and European in general after all.

What a pessimist, Zorba. What about if the states step in and nullify Obamacare adn serve as an interposition between the central government. Only takes a few of them before there is a mass exodus of productive people and jobs to those states. The other states will have to follow or shrivel. Before you know it, the states have taken back the government.

Distributors are also the beneficiaries of govt. redistribution. Government picks the winners, losers, and beneficiaries. Those who have access to political echelons or in a better position to take advantage in the distribution system are the ones who benefit most. So it also starts a race for the gravy train. The whole system is changed, from one based on merit, voluntary exchange, sound incentives to a one based on entitlements, political poweress, and hierarchy/authoritarianism over reason.

Dan, I am glad you are in our corner. It seems to me that everything should be going our way the next few years because liberals must see was is happening in Greece (The “G” in the PIIGS of Europe, 5 countries that are going bankrupt from Europe). However, again I think about all those in Greece that are dependent on government handouts and how angry they looked marching in the street. Freedom has suffered so much with all these welfare programs. I wonder if freedom will win out or the angry mobs that want their government handouts?

This condition will persist along with the ever-accelerating shift to productive capital––which reflects tectonic shifts in the technologies of production. Since the Industrial Revolution subsequent technological advance amplified the productive power of non-human capital. The system of plutocratic finance channels its ownership into fewer and fewer hands, as we continue to witness today with government by the wealthy evidenced at all levels. We need leadership to rechart the economic system to empower capitalless citizens to acquire private, individual ownership in productive capital (machines, superautomation, automated factories, and computerized operations) and pay for their acquisition out of the future earnings of their capital investments. This will create a path to prosperity, opportunity, and economic justice, and reduce growing dependence on redistribution programs embodied in make-work, boondoggle military/industrial contracts, and welfare, and better the livelihood conditions of the citizens along with the revitalized growth of the American economy.

[…] Emily’s view could be considered Randian libertarianism, conventional conservatism, or both. That’s because there’s a common moral belief in both philosophies that government-imposed coercion and redistribution erode the social capital of a people. […]

[…] Emily’s view could be considered Randian libertarianism, conventional conservatism, or both. That’s because there’s a common moral belief in both philosophies that government-imposed coercion and redistribution erode the social capital of a people. […]

Ya’ll are crazybones. You really think anyone is going to quit their awesome job at being lawyer/doctor/stockbroker/job creator and become, I don’t know, a Starbucks barista instead because they have pay more in taxes than the elderly/disabled/unemployed/underemployed?

And somebody, please explain to me where you draw the line on what qualifies as a “handout.” Welfare? Unemployment benefits? Food stamps? Medicare? Medicaid? Veteran’s Disability Benefits? The GI Bill? Farming subsidies? Government loans? Grants? The roads we drive on? The national parks we take our children to? The clean air we breathe and healthy food we eat thanks to government intervention and regulations? The freedom we enjoy thanks to the tax-funded military?

Maybe I’m a wild optimist, but I say: we’re not Greece, we’re not going to become Greece. Government rewards and punishments in the form of lower or higher taxes simply will not affect the American spirit to simply be excellent and expand the horizons of what the world thinks is possible. We’re just better than that.

[…] Emily’s view could be considered Randian libertarianism, conventional conservatism, or both. That’s because there’s a common moral belief in both philosophies that government-imposed coercion and redistribution erode the social capital of a people. […]

[…] There’s a big fiscal battle happening in Europe. The relatively new Greek government is demanding continued handouts from the rest of Europe, but it wants to renege on at least some of the country’s prior commitments to improve economic performance by reducing the preposterous burden of spending, regulation, and intervention. […]